Transcript Tariffs and Non-Tariff Barriers

Free Trade – Good
Restriction – Bad
Free Trade: Price = World Price = $8,000
Domestic Production=20; Domestic Consumption=80; Imports=60
Consumer Surplus: a+b+c+d+e+f+g; Producer Surplus = h
Price ($)
12,000
Sd
11,500
11,000
10,500
g
10,000
9,500
E
e
9,000
a
8,500
b
f
G
c
d
Sd+w+t
F
8,000
Sd+w
h
7,500
7,000
Dd
6,500
6,000
0
10
20
30
40
50
60
70
Quantity of autos
80
90
100
110
Free Trade – Good
Restriction – Bad
Tariff: Price = World Price + Tariff = $8,000 + $1,000 = $9,000
Domestic Production=40; Domestic Consumption=60; Imports=20
Reduced Consumer Surplus: a+b+c+d
Increased Tax Revenue = c
Price ($)
12,000
11,500
Deadweight Loss:
Inefficient Production = b
11,000
10,500
g
10,000
9,500
9,000
a
8,500
Deadweight Loss:
Reduced Consumption = d
E
e
b
Sd
f
G
c
d
Sd+w+t
F
8,000
Sd+w
h
7,500
7,000
Dd
6,500
6,000
0
10
20
30
40
50
60
70
80
90
Quantity of autos
Increased Producer Surplus = a (Redistributive Effect)
100
110
Costs of import restrictions
Domestic consumers face increased costs
 Low income consumers are especially hurt by tariffs
on low-cost imports
Overall net loss for the economy (deadweight loss)
 Production effect: output that cost more than it has to (b)
 Consumption effect: surplus lost from reduced
consumption (d)
 Export industries face higher costs for inputs
 Cost of living increases
 Other nations may retaliate
So why restrict trade?
 Benefits of free trade in final goods are spread
widely
 Tariffs on intermediate inputs tend to be low
 Costs of free trade are felt rapidly by domestic
producers  Lobbying by business and labor
“… those persons who demand cheaper coats would be ashamed of
themselves if they could realize that their demands cut the wages of
the women who made those coats.”
Benjamin Harrison, Election Campaign of 1888
 Strategic trade policy
 Reduce demand for foreign stuff
 lower its price a lot  Big gain on what you still buy
 Ways to restrict trade
 Tariffs
 Non-Tariff Barriers
Flavors of tariffs
Tariff: a tax (duty) on internationally traded products
 Import tariffs
 Export tariffs … unconstitutional in US
 Raise revenue
 Favor domestic users of exported commodities




Protective tariff … insulate domestic producers
Revenue tariff - raise funds for government
Specific tariff - Fixed $/Unit
Ad valorem tariff - % of product’s value
 “Free-on-board” (FOB) as it leaves port
 Levied “cost-insurance-freight” (CIF) as it arrives in port
 Compound tariff - Combination of fixed and ad valorem tariffs
 Levied on finished goods whose imported inputs are subject to tariff
 Fixed portion offsets tariffs on imports paid by domestic producers
 % portion protects domestic producers against finished good imports
5
Effective rate of protection
 For a finished good,
 Effective tariff rate =


{Nominal tariff – (% value Imports)x(Tariff on Imports)}
(% Domestic Value Added)
 The impact of a tariff is often different from its stated amount
 Tariff Escalation: If domestic value added (domestic
content) is low and tariffs on imports are also low
Effective tariff >> Nominal tariff.
Nominal and Effective Tariff Rates
(US and Japan, early 1980s)
US
Japan
Nominal Effective Nominal Effective
Agriculture, fish, forest.
1.8%
1.9%
18.4% 21.4%
Food, beverages,tobacco
4.7
10.6
25.4
50.3
Footwear
8.8
15.4
15.7
50.0
Furniture
4.1
5.5
5.1
10.3
Leather products
4.2
5.0
3.0
-14.8
Paper and paper products
0.2
-0.9
2.1
1.8
Textiles
9.2
18.0
3.3
2.4
Wearing apparel
22.7
43.3
13.4
42.2
Wood products
1.6
1.7
0.3
-30.6
Avoiding and postponing tariffs
 Production sharing  special treatment for
foreign assembly using domestic inputs
 OAP: Offshore Assembly Provision
 Maquiladoras
 Bonded warehouses
 Assemble imported components and reexport duty free
 If sell domestically, tariff is levied only on imported value
 Foreign trade zones (FTZ)
Arguments for trade restrictions
 Job protection
… but losses elsewhere
 Protect against “cheap” foreign labor
… but is foreign labor “cheap”?  Worker productivity
 Fairness in trade - level playing field
Principles of Fair Trade
 Democratic organization
 Producer cooperatives
 Recognize unions
 No child labor
 Decent working conditions
 Environmental sustainability
 Prices that cover production costs
 Price guarantees irrespective of world prices
 Social premiums
 Pay premiums to organizations  public goods
 Long-term relationships
 Reduce uncertainties
Arguments for trade restrictions
 Job protection
… but losses elsewhere
 Protect against “cheap” foreign labor
… but is foreign labor “cheap”?  Worker productivity
 Fairness in trade - level playing field
… but sacrifice gains from trade
 Equalization of production costs
… but whose costs? [Their low cost producer = Our high cost?]
 Infant-industry protection  Achieve efficient scale
… but protect senile industries too?
 Political and social reasons
 Protect against cultural imperialism
 National defense/Self–sufficiency…reduce interdependence
... but could build strategic reserves instead
Non – Tariff Barriers (NTBs)
Import quotas
 Quota: how much can be imported in a year
 Global quotas
 Selective quotas
 Government loses tariff revenue
 Quota is insensitive to demand shifts
 Tariff-rate quota: a two-tiered tariff
 More can be imported if demand increases … but
only at a higher tariff rate
Other NTBs
 Voluntary export restraints (VERs)
 export quota by foreign country … or else
 Japanese auto exports  unintended
consequences
 Domestic content requirements
 Subsidies
 Domestic subsidy … e.g. R & D
 Export subsidy
 Government procurement policies
 Social regulations (health, environmental
and safety rules … MGOs)
 Sea transport and freight restrictions
Costs of import restrictions redux
Domestic consumers face increased costs
Overall net loss for the economy (deadweight loss)
 Production effect: output that cost more than it has to (b)
 Consumption effect: surplus lost from reduced
consumption (d)
 Export industries face higher costs for inputs
 Cost of living increases
 Retaliation